S&P 500, USDJPY, Crude Oil Talking Points:
- A 3 percent S&P 500 rally this past week has extended a 31 percent recovery from March 23rd’s low and pushed the benchmark back above the 50-day moving average
- Earnings season carries into next week with Netflix, CSX, Intel and a few airlines worth watching closely for the corporate impact of the US Coronavirus shutdown
- The Dollar, Yen and Gold are worth watching for the degree of risk trends; oil’s collapse to fresh 18-year lows suggests growth pressure and HYG and FX curb stimulus views
Despite Severe Economic Pain, A 31% S&P 500 Rally
Speculative appetite finished strong this past week. While the was much to be desired in the consistency of the bullish performance through the period, many of the ‘risk’ benchmarks I follow to gauge market optimism managed gains that built upon a more robust outing the week before. In particular, I have been watching the US equity indices which seem to be reclaiming their title for outperformance which was such a common feature of the landscape over the past decade. From the S&P 500, Friday’s 3 percent rally extended the reversal from March 23rd to a 31 percent charge in the span of 19 trading days. Historically, that is extraordinary. Against the backdrop of volatility and the utter collapse through March, it is less exceptional. Nevertheless, this climb seems to be carry much of the hopes and dreams of many bulls that have had their long-gilded conviction shaken this year.
| Change in | Longs | Shorts | OI |
| Daily | 0% | 5% | 2% |
| Weekly | 14% | -13% | 0% |
Chart of S&P 500 Emini Futures with Daily Gaps (Daily)
Chart Created on Tradingview Platform
When gauging the market’s performance, I am starting to pay closer attention to the differences emerging across various assets. The momentum for US indices relative to global counterparts is a familiar one for anyone having watched the markets these past years. That said, it may seem natural that SPX relative to the DAX, Nikkei 225 or VEU (rest of world equity ETF), but the climb itself should draw scrutiny against a recession that the world’s governments have warned is upon us. That reality seems to be coming through far clearer in crude oil more clearly than most assets sensitive to growth. In clear contrast to the S&P 500, the US-based WTI crude contract slid below $19 and tested waters last seen in November 2001. A natural collapse in demand for the commodity seems so thorough that coordinated and deep supply cuts can’t seem to stem to plunge.
| Change in | Longs | Shorts | OI |
| Daily | 6% | 3% | 4% |
| Weekly | 8% | -15% | -7% |
Chart of US-Based WTI Crude Oil Futures (Monthly)
Chart Created on Tradingview Platform
Risk Measures to Monitor: Dollar, Yen and Gold
Though risk-off – much less full blown fear – seems to be far from minds of market participants at this moment, the ingredients to aggravate serious sentiment gaps are within easy reach. As such, I will keep careful tabs on the market-based measures of sentiment that can point to systemic rifts before the more comprehensive waves of pain hit. Moving through the scales of market perspective, I’m watching for the combination of correlations and intensity of movement. At present, there is a general bullish move with disparate pacing and VIX that holds around 40. This is as incongruous a mix for setting any genuine conviction as can be imagined.
Chart of Risk Trend Intensity
Chart Created by John Kicklighter
Should we see risk move back towards the extremes, my attention will fall back onto the Dollar. In that environment, most higher risk assets will likely be sliding indiscriminately but the nuance would show up more tangibly in the havens. In particular, the comparison between the Dollar and Japanese Yen is proving to be an important gauge for intensity. The latent carry trade unwind (really just Japanese investors with higher risk tolerance to seek yield repatriating) boosts the Yen in moderate levels of aversion, even against the Greenback. Yet, when the question of certain countries’ financial stability comes into play, then the world’s most heavily used currency is without equal. Alternatively, a speculative unwind that doesn’t tip into panic will likely continue to benefit Gold as the effort to fight the fire with stimulus deflates the vast majority of the fiat wealth in the system as consequence.
Asset Chart for Risk Trends
Chart Created by John Kicklighter
Core Fundamental Themes: Earnings and April Growth
Looking ahead to next week, there are a few themes of fundamental merit to monitor. US earnings will be once such consideration. The banks that reported this past week raised the warning flag for approaching defaults with large provisions being set aside, but the most interesting update in my book was Ford’s warning Friday that it faced a loss of up to $2 billion through the first quarter (they report later in the month). This will turn my attention to more traditional economy connected CSX and Union Pacific reports. Airlines will be another hard hit group with the measures to combat the coronavirus particularly influential to the industry’s business. This sets the stage for the top update on my list: Netflix. The FAANG member is far less impacted in the shutdown measures, but it isn’t immune to a possible drop in consumption.
Chart of Netflix Overlaid by Nasdaq Composite (Daily)
Chart Created on Tradingview Platform
Growth will be another assumed them to follow through the next week (and weeks) ahead. There is plenty that can be interrupted as economically related, but there are certain figures that will hold more tout than others. The South Korean first quarter GDP figure will be a key update for Asia where China’s data draws a lot of skepticism in the world. A more comprehensive update will be the run of April PMI figures from Australia, Japan, Europe, the UK and the US. That as singular and timely a growth update as we can get through data channels.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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